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11.

United States Attorney General Opinion, August 7, 1911

29 U.S. Op. Atty. Gen. 217

CORPORATION TAX--RETURNS--COMPROMISE OF PENALTIES.

[217] Every corporation subject to the tax under the corporation-tax act of August 5, 1909 (36 Stat. 114), must make returns whether or not its net income is large enough to make it liable for any amount of that tax.

For a mere failure to make such returns in time, in the case of corporations with incomes so limited as not to be liable to the payment of any tax, liberal compromise is a course required by the spirit and policy of the laws of the United States.

The PRESIDENT.

SIR:

The Attorney General referred to me your request of the 1st instant for an opinion on the question of returns to be made by corporations under the corporation-tax law of 1909. (36 Stat. 112.) He has submitted in that connection the letter to you of July 31, 1911, by the Hon. F. S. Jackson, of Kansas, and also the letter to himself by Mr. Jackson of July 24, 1911. In his letter to the Attorney General, Mr. Jackson states his views at length and I have given them careful consideration. He presents two propositions, which he states as follows, viz:

'(1) That the plain and practical construction of the law is that corporations exempt from tax under this law on account of having a net income of less than $5,000 are not [218] compelled to file an annual report; that corporations not required to report are not subject to the penalties of paragraph '8'; and

'(2) That the commissioner is without authority to compromise penalties under this act, unless such penalties are for the nonpayment of taxes.'

In support of his first proposition Mr. Jackson says:

'The statute is founded on the war-tax law of 1898 and the income-tax law of 1894, and the text for the most part consists of a selection of language from both acts appropriate to the subject in hand. It was never claimed under either of these laws that every person and every corporation in the United States was compelled to submit an annual report to the collector of revenue to enable that officer to ascertain if the person or company was subject to the tax.

'The constructions of these laws was the plain and practical one, that when a person, firm, or corporation reached the amount of income taxable under the statute, such person, firm, or corporation was bound to report that fact to the proper assessing officer.'

Under the law of 1894 (28 Stat. 553) the tax fell upon all individual incomes above $4,000 and upon all the net income of business corporations.

The law in express terms required all persons having an income in excess of $3,500 to make returns, and it explicitly required returns from all business corporations whether or not they had any net incomes during the year.

The matters of returns having been prescribed by the express terms of the law of 1894, governmental usage under the law can not help greatly to a construction of the law of 1909. So far, however, as the law and practice under it are pertinent, they support the requirement of return from all corporations subject to the tax, whether or not for any particular year they are bound for the payment of any amount of tax.

The war-tax law of 1898 (30 Stat. 448) is more in point. This law provided:

'SEC. 27. That every person, firm, corporation, or company carrying on or doing the business of refining petroleum, or refining sugar, or owning or controlling any pipe line for [219] transporting oil or other products, whose gross annual receipts exceed two hundred and fifty thousand dollars, shall be subject to pay annually a special excise tax equivalent to one-quarter of one per centum on the gross amount of all receipts of such persons, firms, corporations, and companies in their respective business in excess of said sum of two hundred and fifty thousand dollars.

'And a true and accurate return of the amount of gross receipts as aforesaid shall be made and rendered monthly by each of such associations, corporations, companies, or persons to the collector of the district in which any such association, corporation, or company may be located, or in which such person has his place of business. Such return shall be verified under oath by the person making the same, or, in case of corporations, by the president or chief officer thereof. Any person or officer failing or refusing to make return as aforesaid, or who shall make a false or fraudulent return, shall be liable to a penalty of not less than one thousand dollars and not exceeding ten thousand dollars for each failure or refusal to make return as aforesaid and for each and every false or fraudulent return.'

The subject matter of the tax under this law was the designated business; the measure of the tax was the gross receipts of that business. No liability for any amount of tax was incurred by those subject to it, unless the volume of their business exceeded $250,000 per year.

The analogy between this law and that of 1909 is very close, as in each case only those subject to the tax are required to make returns. The law of 1898 was construed by the Treasury Department to require returns from all who were engaged in the designated business. As to this, the circular letter issued by the department July 7, 1899, prescribed:

'Returns, when and by whom to be made.--Every person, firm, corporation, or company liable to tax under said section 27 will hereafter render a return, on Form 420 revised, of the gross amount of all receipts each month, and not later than the fifteenth day of the following month. When the returns made include the receipts of any branch or 'constituent' company engaged in the business of refining [220] petroleum or sugar, or in operating any pipe line in the same or in another district, the name and location and the receipts of each such branch or constituent company should be stated in each return rendered.

'The foregoing instructions will also apply to all such persons, firms, corporations, and companies where the gross receipts, during the period for which the return required by law is made, do not exceed the $250,000 specially exempted from tax. A monthly return will also be required during the temporary suspension of business. Where, however, the business carried on has been permanently discontinued, that fact should be noted on the last return rendered.'

This usage of the Government requiring all those engaged in the designated business as being subject to the tax, to make returns, even though the volume of business was not large enough to make them liable for any amount of tax, was no doubt in the mind of Congress when enacting the law of 1909, and should be considered in construing that law.

The subject matter of taxation by the corporation-tax act is business carried on by corporations. The measure of the tax is the net income of that business ascertained as prescribed by the law. (Corporation Tax Cases, 220 U. S. 107.) Every business corporation, unless specifically excepted by designation of kind, is subject to the tax. Whether in any year it is bound for any amount of tax and what amount, if any, depends upon the amount of its net income for that year. This must be determined in the first instance by the Commissioner of Internal Revenue from the returns which are required to be made under the third paragraph of the law by 'each of the corporations * * * subject to the tax imposed by this section.' The commissioner makes the assessment of the amount due on these returns. This assessment involves the exercise of judgment in the determination of what is net income under the law, and the determination of the amount of net income, if any, in excess of $5,000.

As well permit the corporation to determine for itself how much tax it is liable for as permit it to so determine [221] whether it is liable for any amount. The law in every respect is to be administered by the officers of the law and not by those who are subject to it. Efficiency of administration would be difficult, and even impossible, if the corporations could determine, each for itself, whether or not they were liable for any amount of tax, and make or withhold returns accordingly.

The plain terms of the law are otherwise. Upon evidence adduced before the commissioner which in his opinion justifies the belief that a return is incorrect he may investigate the records of the company and examine witnesses, and upon the information thus acquired he may amend the return.

And 'whenever any collector shall report to the Commissioner of Internal Revenue that any corporation * * * has failed to make a return as required by law, * * * the Commissioner of Internal Revenue * * * for the purpose of making a return where none has been made, is hereby authorized' to examine the books and records of the company and take the testimony of witnesses, etc., and 'upon the information so acquired the Commissioner of Internal Revenue may * * * make a return where none has been made.'

Under this provision of law it is manifest that the return which the commissioner may make after his examination is the same the company should have made without such examination. If the company, because its net income does not exceed $5,000 for the year, needs not to make a return, then the commissioner has no right to examine it, for it has not 'failed to make a return as required by law,' and the commissioner would be a trespasser if he attempted an inquest of its affairs.

The right to examine where no return has been made is to enable the commissioner to determine, not whether the company is subject to the tax, but whether or not its income is such as to make it liable in some amount and in what amount. If upon the examination it transpires that the company's net income was less than $5,000, the commissioner has done no wrong, for he has simply ascertained a [222] fact which it was his duty to ascertain. And inasmuch as he may ascertain this fact by examination, he may also ascertain it by the requirement of a return.

At the very beginning of administration under this law, the Treasury Department held (circular letter of March 29, 1910) that 'every corporation, etc., not specifically enumerated as exempt shall make the return required by law, although its net income during the year may not have exceeded $5,000.'

This ruling is in accord with the previous usage of the Government, is required for the efficient administration of the law, and is amply justified by its terms.

Mr. Jackson's second proposition is that there can be no compromise in the case of failure of any corporation to make return on or before the 1st of March of any year.

Power to compromise cases or claims like those in question is found in sections 3229 and 3469 of the Revised Statutes. These sections are as follows:

'SEC. 3229 The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, may compromise any civil or criminal case arising under the internal-revenue laws instead of commencing suit thereon; and, with the advice and consent of the said Secretary and the recommendation of the Attorney General, he may compromise any such case after a suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the commissioner the opinion of the Solicitor of Internal Revenue, or of the officer acting as such, with his reasons therefor, with a statement of the amount of tax assessed, the amount of additional tax or penalty imposed by law in consequence of the neglect or delinquency of the person against whom the tax is assessed, and the amount actually paid in accordance with the terms of the compromise.

'SEC. 3469. Upon a report by a district attorney, or any special attorney or agent having charge of any claim in favor of the United States, showing in detail the condition of such claim, and the terms upon which the same may be compromised, and recommending that it be compromised upon the terms so offered, and upon the [223] recommendation of the Solicitor of the Treasury, the Secretary of the Treasury is authorized to compromise such claim accordingly. But the provisions of this section shall not apply to any claim arising under the postal laws.'

Referring to section 3469, Mr. Jackson says:

'Every Attorney General and every court which has been called upon to pass on this section of the statutes has warned against the abuse and expressed doubt as to the construction asked for by the Executive officers referring to it as an authorization of the acts.'

The authorities cited can not be said to support this statement.

The opinion of the Attorney General referred to in the twelfth volume of opinions, page 472, deals simply with the course of proceeding to be observed relative to the compromise of suits under the internal revenue law, and has no bearing upon the matter here under consideration.

The opinion of the Attorney General in 13 Op. p. 479, distinctly recognizes the authority to compromise claims of this general nature before judgment, by the Treasury Department alone before suit brought, and by the Treasury Department upon recommendation of the Attorney General after the institution of suit.

The opinion of the Attorney General in 23 Op. p. 507, does not limit the authority to compromise under section 3229 to claims for taxes. The Attorney General in that case had to deal with a suit brought against the United States, and he was discriminating simply between claims against the United States and claims by the United States. His holding was that suits against the United States could be compromised only by the Attorney General, but that claims by the United States under the internal-revenue laws might be compromised by the Treasury Department.

The opinion of Wayne MacVeagh, 27 Internal Revenue Record, page 334, is peculiarly in point, as it deals especially with the enforcement of severe penalties for purely technical violations of the internal-revenue law. Mr. MacVeagh says:

'I am also unable to imply from the provisions of the law under review any intention on the part of Congress [224] that the Secretary of the Treasury should be compelled to pursue litigations out of which the United States might undoubtedly realize smaller or greater sums of money, but which, in his judgment, ought not to be further prosecuted. As an illustration, if a person has been guilty of a technical violation of the internal-revenue laws, and, upon being informed of it, offers to compromise the case by the payment of the costs, and of any other sum justly due the Government, I see no evidence in these sections of the Revised Statutes, or in the laws from which they were drafted, that Congress intended to require that suit shall be commenced and prosecuted to extort the penalty intended only for wilful violators of the law; and the same considerations would apply to a great variety of cases, some of which must be of frequent occurrence in the administration of the Tr easury Department, where the rigid enforcement of the technical legal rights of the Government would work manifest and plain injustice by taking from citizens money which, in the forum of conscience and good morals, they did not owe to it. It is not necessary to hold that the Secretary of the Treasury is, in the matter of compromises, a fountain of the compassion of the Government or an almoner of its charity. Those are considerations which do not belong to the administration of a business department. But, on the other hand, it is to my mind as clearly unnecessary to hold that the Secretary is bound to be an instrument of manifest injustice, and to ask himself only, in every case, this question: Will the prosecution of the claim in question probably bring to the Treasury more money than its compromise upon the terms proposed?

'I have, therefore, to advise you that while, in considering any compromise submitted to your judgment, you are not at liberty to act from motives merely of compassion or charity, you are at liberty, until Congress sees fit to limit your authority, to consider not only the pecuniary interests of the Treasury, but also general considerations of justice and equity and of public policy.'

[225] And the Supreme Court, in Dorsheimer v. United States, 7 Wall. 166, also dealing with the compromise of claims under the internal-revenue laws, said:

'The power intrusted by law to the Secretary was not a judicial one, but one of mercy, to mitigate the severity of the law. It admitted of no appeal to the Court of Claims, or to any other court. It was the exercise of his discretion in a matter intrusted to him alone, and from which there could be no appeal.' (Pp. 174, 175.)

In the cases with which we have now to deal the facts are well understood. Corporations subject, because of their kind and class, to the corporation-tax law, but from which, because their net income was less than $5,000, no tax was due, failed to make returns on or before March 1 of the year. This failure was due to inadvertence or to a belief that no return was due because no tax was due. We are not dealing with the case of a fraudulent return or the fraudulent withholding of a return, but with cases in which there is not the slightest degree of moral turpitude. To these cases, the considerations so forcibly stated by Attorney General MacVeagh are peculiarly applicable.

Sections 3229 and 3469 are not restricted in terms, nor by any reasons of public policy to penalties for the nonpayment of taxes. Section 3229 authorizes the compromise of 'any civil or criminal case arising under the internal- revenue laws.' This is not limited by the further provision that in case of a compromise there shall be filed in the office of the commissioner a statement of the amount of tax assessed, etc. This requirement of filing a statement of the terms and conditions of the compromise is a mere matter of procedure to be followed in every case to which it is applicable. And section 3469 broadly authorizes the compromise of 'any claims in favor of the United States' except those 'arising under the postal laws.'

To sum up, I believe the construction of the law by the Treasury Department as to the requirement of returns is a proper construction; and, further, that for a mere failure to make such returns in time, in the case of corporations [226] with incomes so limited as not to be liable to the payment of any tax, liberal compromise is a course required by the spirit and policy of the laws of the United States.

Very respectfully,

F. W. LEHMANN,

Solicitor General.

Approved:

GEORGE W. WICKERSHAM.